Why There's Still Hope for Detroit

OKLAHOMA CITY -- As chairman of the Center for Automotive Research, David E. Cole could fill books with his knowledge of the U.S. automobile industry.

While others have written off General Motors ( GM) and the other Detroit automakers, Cole still holds out hope for a happy ending to the story. Cole even looks for some crowd-pleasing plot twists, such as universal health care and battery-powered vehicles, to enhance the tale along the way.

"Because of the crisis atmosphere, you can do big things," Cole explains. "People are willing to do things that they would never do before. Right now, the sense of urgency is very, very high."

Cole remembers the last time the domestic automakers came under serious pressure. In mid-2007, they faced crucial labor negotiations that could ultimately determine their ability to survive. Once the United Auto Workers recognized the gravity of the situation, the union agreed to start covering retiree health benefits, carrying an estimated price tag of $100 billion, a few years down the road.

That groundbreaking deal, set to take effect next January, slashed wages and benefits for incoming workers, as well. It even scaled back benefits for existing employees who had always expected top-notch coverage in the past.

To hear Cole tell it, the Big Three automakers uncovered buried treasure with that legendary deal.

"If you say, 'Here's your choice: You can have the gold or the silver health care plan,' people will take the gold health plan every time," Cole says. "But the axis of choice shifted, and it was no longer gold or silver, but instead silver or lead.

"Suddenly, when gold is off the table, silver starts to look pretty good."

To be sure, the automakers face much tougher decisions right now. Somehow, they must find a way to spend far less building vehicles that consumers want more. If Cole's plot line proves correct, they may need serious help from the government, extending well beyond emergency bailout funds, in order to succeed.

Cole ranks among the top automobile experts in the country. As chairman of the Center for Automotive Research, a nonprofit organization known for its detailed studies of the industry, Cole has focused much of his recent attention on restructuring efforts by the U.S. automakers. The government funds most of his center's studies, with automakers and other organizations pitching in as well.

Before assuming his current post, Cole made a name for himself in academia. He previously directed the Office for the Study of Automotive Transportation at the University of Michigan, the state where GM, Ford ( F) and Chrysler are all based, and earned three degrees, including a doctorate, from the school before that. He has also served as director of the "Automotive Hall of Fame" and picked up numerous awards over the course of his long career.

In a recent interview with TheStreet.com, Cole spoke at length about the immediate challenges faced by the U.S. automobile industry.

TSC: What steps must the Detroit automakers take in order to secure additional funding from the government?

Cole: When fully implemented, their most recent labor contracts will make their labor costs competitive. It's more a matter of moving things up than anything else. I think there was a perception that they were way out of step. But when you match it up, worker to worker, I don't think it's that difficult to get a good match. Once the government gets a better understanding of their new cost structure, I think the discussions will be driven by a much more contemporary set of facts. And I think that will be key.

TSC: Could the automakers save a lot of money by enacting those wage cuts before their new contracts officially start next year?

Cole: It would be more symbolic than anything. Labor represents only 10% of their total costs. So you can't solve the problem on labor.

TSC: Are health care costs a bigger problem than wages? If so, what is the solution?

Cole: Health care costs have risen at several times the rate of inflation. It's a horrifying problem for the industry. Other countries have single-payer health care systems. President Obama has pledged to move forward on some type of nationalized health care system here. This is serving to kind of bring things to a head.

TSC: Do you really believe that the current automobile crisis could lead to nationalized health care?

Cole: I think it will push health care reform forward. The competitiveness related to this issue will become much more visible. If we do something like other countries, we could have a single-payer health care system that offers total, or even catastrophic, coverage. The idea is to move to a higher level of role for the government. There's a huge incentive to try to do something here, and it could be extremely helpful to the industry.

TSC: Why don't the foreign "transplants," such as Toyota ( TM) and Honda ( HMC), face the same health care costs that have crippled GM and its domestic peers?

Cole: GM covers over 1 million retirees. If the company continued to do this, that number would actually peak and then begin to fall. The death rate in that group is actually pretty high. If you go out to 2025, the number would be fairly small. The Toyotas and the Hondas would be picking up substantial numbers of retirees. So there would be a crossover point where their costs would actually be greater than those for the domestic companies. The problem is that the domestic companies won't be able to live that long (if they keep covering those benefits).

TSC: The automakers already tried to address this issue on their own. Under their new labor agreements, they can shift the responsibility for retiree health care benefits over to new Voluntary Employees' Beneficiary Association accounts controlled by the union. Will this solve their problem?

Cole: The auto manufacturers still have to come up with billions of dollars for their VEBAs. The UAW said they could delay their 2009 commitments, which is probably the biggest thing it could do. But if the government comes up with some type of national health care program, it would dramatically alter the funding requirements. Reducing that would have a huge impact.

TSC: If the government comes through with nationalized health care, what role will the automakers play in their own comeback? How important will fuel-efficient cars, such as GM's new plug-in Chevy Volt, prove to be?

Cole: The Volt represents a new wave of technology, and it's very, very significant in that respect. It's a big deal. The science is here, and GM recognized that the science is here. If you take something like the Chevy Volt, which will run on 85% ethanol and 15% gasoline, you're getting roughly 400 miles out of a gallon of gasoline. That's when you begin to think in terms of really significant game-changing events.